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Rate Cut Puts New Zealand ETF in Focus

Taking cues from global growth worries, the Central Bank of New Zealand surprisingly cut interest rates to a new record low on March 9 and hinted at additional easing, if need be. The move followed the bandwagon of global policy easing, especially in the developed, world to boost economic growth and inflation.

The central bank of New Zealand slashed its official cash rate by 25 bps to 2.25% to counter threats emanating from soft global growth –, mainly around China and Euro zone. Also, uncertain global financial markets, the commodity market rout, a struggling dairy sector – one of the key contributors to the country’s GDP – and troubles in the housing market led the bank to ease its policy unexpectedly, per tradingeconomics. Prior to this, the bank had lowered its key interest rate by 25 bps in December 2015.

Consumer prices in New Zealand nudged up 0.1% year over year in the fourth quarter of 2015, missing market expectations and marking the lowest level since the third quarter of 1999. This raised concerns among policy makers. Supper accommodative monetary policies from Japan to Euro zone made the New Zealand dollar stronger and kept consumer prices below the target range of 1–3%, per Bloomberg. So, a rate cut is essential to attain the 2% inflation goal by early 2018.

Investors should note that New Zealand became the first nation in the developed world to raise its benchmark interest rate in March 2014. This was followed by three more hikes to 3.5% till July 2014. However, the trend reversed from June 2015 when the central resorted to a 25-bp rate cut to 3.25% (read: Rate Hike Puts New Zealand ETF in Rare Company).

Market Impact

The New Zealand dollar soon lost strength against the greenback following the announcement, though by 0.2% in one day (as of March 9, 2016). While a rate cut is normally viewed as a step forward in expediting growth and boosting the stock market, we are uncertain about how much return can be reaped by the strategy that New Zealand has adopted.

It is true that many other developed economies are presently practicing way more accommodative policies. But they haven’t been able to make a jumpstart in their growth goals. Still, the move was probably necessary to give export a boost (read: Japan ETFs to Tap on Renewed Stimulus Hopes).

The coming few days should go in favor of the New Zealand stock market. All these possibilities definitely turn our attention to the only pure-play ETF on this nation – iShares MSCI New Zealand Capped (ENZL).

ENZL in Focus

This ETF tracks the MSCI New Zealand Investable Market Index, giving investors exposure to 29 stocks. The product is not immensely popular with an asset base of $69.1 million and trading volume of about 35,000 shares per day. It charges investors 47 bps in annual fees.

The fund is not widely spread across individual securities. It puts nearly 65% of the assets in the top 10 holdings with Auckland International, Spark New Zealand Ltd and Fletcher Building, taking the top three positions. The trio makes up for a combined 30% share. From a sector perspective, utilities, healthcare, industrials, telecom, consumer discretionary and materials receive a double-digit allocation each.

In terms of performance, ENZL is up about 1.5% so far this year (as of March 8, 2016). In the last one year (as of March 8, 2016), the fund lost just 2.2%. The ETF currently yields 4.18% in dividend per annum making it a useful destination for income-seeking investors, especially at this low-yield environment. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see all Asia-Pacific Developed ETFs here).

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